There's another fine mess QE has got us into

Quantitative Easing is meant to boost growth by increasing investors' risk appetite, right? Well here's an example of the law of unintended consequences as it relates to QE.

According to new estimates published on Tuesday by the Pension Protection Fund, the aggregate deficit of the 6,533 schemes in the PPF 7800 index is estimated to have increased during September to £196.4 billion, from a deficit of £117.5 billion at the end of August. This is close to an all time record. Liabilities of £1160.2 billion are backed by assets of just £963.8 billion. What is more, there are little more than 1,000 schemes in surplus. The vast bulk are in deficit.

What's caused this sudden deterioration? In part it is the sell-off in the stock market, which has been partially reversed since the end of September. But the bigger variable is the rise in liabilities, which in turn has been caused by the decline in gilt yields. Pension funds are required to measure their liabilities by reference to gilt yields. The lower the yields go, the more it costs to buy the same amount of benefit.

The latest leg of the gilt edged rally was caused by anticipation of a further bout of "quantitative easing" from the Bank of England, which was duly delivered last week. Ergo, QE is causing the increase in pension deficits.

And here's where it gets really interesting, because once deficits get to a certain size, sponsoring companies are brought under sustained pressure from the Pensions Regulator to close the gap by increasing their contributions. Having to pay more to honour legacy liabilities will in turn further crimp already feeble business investment in the future, and therefore growth. Or as Michael Saunders of Citigroup puts it: "If sustained, rising corporate pension deficits will put pressure on companies to lift pension contributions. Effects on investment and jobs are not definite, but probably adverse".

It's impossible to know how serious the phenomenon might be, but it's another potential negative from QE which I'm willing to bet hasn't been fully taken into account by policymakers.